EX-99.(C)(2) 4 d07243a2exv99wxcyx2y.txt APPRAISAL OF SUN RIVER VILLAGE SUN RIVER VILLAGE 605 W. BASELINE TEMPE, AZ MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 6, 2003 PREPARED FOR: APARTMENT INVESTMENT AND MANAGEMENT COMPANY (AIMCO) C/O LINER YANKELEVITZ SUNSHINE & REGENSTREIF LLP & LIEFF CABRASER HEIMANN & BERNSTEIN ON BEHALF OF NUANES, ET. AL. [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LETTERHEAD] JULY 14, 2003 Apartment Investment and Management Company ("AIMCO") c/o Mr. Steven A. Velkei, Esq. Liner Yankelevitz Sunshine & Regenstreif LLP 1100 Glendon Avenue, 14th Floor Los Angeles, California 90024-3503 Nuanes, et al.( "Plaintiffs ") c/o Ms. Joy Kruse Lieff Cabraser Heimann & Bernstein Embarcadero Center West 275 Battery Street, 30th Floor San Francisco, California 94111 RE: SUN RIVER VILLAGE 605 W. BASELINE TEMPE, MARICOPA COUNTY, AZ In accordance with your authorization, we have completed the appraisal of the above-referenced property. This complete appraisal is intended to report our analysis and conclusions in a summary format. The subject property consists of an apartment project having 334 units with a total of 286,180 square feet of rentable area. The improvements were built in 1981. The improvements are situated on 14.3 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 73% occupied. It is our understanding the appraisal will be used by the clients to assist the San Mateo Superior Court in the settlement of litigation between the above mentioned clients. The appraisal is intended to conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by the Appraisal Standards Board of the Appraisal Foundation and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. The appraisal is presented in a summary report, and the Departure Provision of USPAP has not been invoked in this appraisal. It is entirely inappropriate to use this value conclusion or the report for any purpose other than the one stated. AMERICAN APPRAISAL ASSOCIATES, INC. LETTER OF TRANSMITTAL PAGE 2 SUN RIVER VILLAGE, TEMPE, AZ The opinions expressed in this appraisal cover letter can only be completely understood by reading the narrative report, addenda, and other data, which is attached. The appraisal is subject to the attached general assumptions and limiting conditions and general service conditions. As a result of our investigation, it is our opinion that the fee simple market value of the subject, effective May 6, 2003 is: ($13,000,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Douglas Needham ------------------- July 14, 2003 Doug Needham, MAI #053272 Managing Principal, Real Estate Arizona State Certified General Real Estate Appraiser #30943 Report By: Ryan Tanaka AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 SUN RIVER VILLAGE, TEMPE, AZ TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary .................................................... 4 Introduction ......................................................... 9 Area Analysis ........................................................ 11 Market Analysis ...................................................... 14 Site Analysis ........................................................ 16 Improvement Analysis ................................................. 16 Highest and Best Use ................................................. 17 VALUATION Valuation Procedure .................................................. 18 Sales Comparison Approach ............................................ 20 Income Capitalization Approach ....................................... 26 Reconciliation and Conclusion ........................................ 38 ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 SUN RIVER VILLAGE, TEMPE, AZ EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Sun River Village LOCATION: 605 W. Baseline Tempe, AZ INTENDED USE OF ASSIGNMENT: Court Settlement PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate INTEREST APPRAISED: Fee simple estate DATE OF VALUE: May 6, 2003 DATE OF REPORT: July 14, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 14.3 acres, or 622,908 square feet Assessor Parcel No.: 301-04-002-K Floodplain: Community Panel No. 04013C2165G (July 19, 2001) Flood Zone A, an area outside the floodplain. Zoning: R-3 (Multi Family Residential) BUILDING: No. of Units: 334 Units Total NRA: 286,180 Square Feet Average Unit Size: 857 Square Feet Apartment Density: 23.4 units per acre Year Built: 1981 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ----------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income ---------------------------------------------------------------------------------- 1Bd/1Ba 720 $ 550 $0.76 $ 88,000 $1,056,000 2Br/1Ba 846 $ 615 $0.73 $ 34,440 $ 413,280 2Br/2Ba 1,006 $ 683 $0.68 $ 68,300 $ 819,600 3Br/2Ba 1,194 $ 869 $0.73 $ 10,428 $ 125,136 3Br/2Ba 1,446 $1,068 $0.74 $ 6,408 $ 76,896 -------------------------------------- Total $207,576 $2,490,912
OCCUPANCY: 73% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 13 Years REMAINING ECONOMIC LIFE: 32 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 SUN RIVER VILLAGE, TEMPE, AZ SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - OFFICE EXTERIOR - LANDSCAPE & PARK AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 SUN RIVER VILLAGE, TEMPE, AZ NEIGHBORHOOD MAP [MAP] HIGHEST AND BEST USE: As Vacant: Hold for future multi-family development As Improved: Continuation as its current use METHOD OF VALUATION: In this instance, the Sales Comparison and Income Approaches to value were utilized. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 SUN RIVER VILLAGE, TEMPE, AZ PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit --------------------- ------ ------ Potential Rental Income $ 2,490,912 $ 7,458 Effective Gross Income $ 2,302,645 $ 6,894 Operating Expenses $ 1,029,290 $ 3,082 44.7% of EGI Net Operating Income: $ 1,206,555 $ 3,612 Capitalization Rate 9.00% DIRECT CAPITALIZATION VALUE $12,800,000 * $38,323 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 22% Stabilized Vacancy & Collection Loss: 15% Lease-up / Stabilization Period 24 months Terminal Capitalization Rate 9.50% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $12,900,000 * $38,623 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $12,900,000 $38,623 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $23,500 to $77,083 Range of Sales $/Unit (Adjusted) $38,542 to $42,318 VALUE INDICATION - PRICE PER UNIT $13,100,000 * $39,222 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 6.73 to 7.88 Selected EGIM for Subject 6.75 Subject's Projected EGI $ 2,302,645 EGIM ANALYSIS CONCLUSION $15,000,000 * $44,910 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $14,500,000 * $43,413 / UNIT RECONCILED SALES COMPARISON VALUE $13,500,000 $40,419 / UNIT
------------ * Value indications are after adjustments for concessions, deferred maintenance, excess land and lease-up costs, if any. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 8 SUN RIVER VILLAGE, TEMPE, AZ PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $13,100,000 NOI Per Unit $14,500,000 EGIM Multiplier $15,000,000 INDICATED VALUE BY SALES COMPARISON $13,500,000 $40,419 / UNIT INCOME APPROACH: Direct Capitalization Method: $12,800,000 Discounted Cash Flow Method: $12,900,000 INDICATED VALUE BY THE INCOME APPROACH $12,900,000 $38,623 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $13,000,000 $38,922 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 SUN RIVER VILLAGE, TEMPE, AZ INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 605 W. Baseline, Tempe, Maricopa County, AZ. Tempe identifies it as 301-04-002-K. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Ryan Tanaka on May 6, 2003. Doug Needham, MAI has not made a personal inspection of the subject property. Ryan Tanaka performed the research, valuation analysis and wrote the report. Doug Needham, MAI reviewed the report and concurs with the value. Doug Needham, MAI and Ryan Tanaka have extensive experience in appraising similar properties and meet the USPAP competency provision. The scope of this investigation comprises the inspection of the property and the collection, verification, and analysis of general and specific data pertinent to the subject property. We have researched current improved sales and leases of similar properties, analyzing them as to their comparability, and adjusting them accordingly. We completed the Sales Comparison and Income Capitalization Approaches to value. From these approaches to value, a concluded overall value was made. DATE OF VALUE AND REPORT This appraisal was made to express the opinion of value as of May 6, 2003. The date of the report is July 14, 2003. PURPOSE AND USE OF APPRAISAL The purpose of the appraisal is to estimate the market value of the fee simple interest in the subject property. It is understood that the appraisal is intended to assist the clients in litigation settlement proceedings. The appraisal was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. PROPERTY RIGHTS APPRAISED We have appraised the Fee Simple Estate in the subject property (as applied in the Sales & Income Approaches), subject to the existing short-term leases. A Fee Simple Estate is AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 SUN RIVER VILLAGE, TEMPE, AZ defined in The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), as: "Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." MARKETING/EXPOSURE PERIOD MARKETING PERIOD: 6 to 12 months EXPOSURE PERIOD: 6 to 12 months HISTORY OF THE PROPERTY Ownership in the subject property is currently vested in CPF XIV. To the best of our knowledge, no transfers of ownership or offers to purchase the subject are known to have occurred during the past three years. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 11 SUN RIVER VILLAGE, TEMPE, AZ AREA / NEIGHBORHOOD ANALYSIS NEIGHBORHOOD ANALYSIS A neighborhood is a group of complementary land uses. The function of the neighborhood analysis is to describe the immediate surrounding environs. The subject is located in the city of Tempe, AZ. Overall, the neighborhood is characterized as a suburban setting with the predominant land use being residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - S. Eastshore Dr. West - 10 Fwy South - W. Guadalupe Rd North - 60 Hwy MAJOR EMPLOYERS Major employers in the subject's area include Wells Fargo, Intel, State of Arizona, Wal-Mart Stores Inc, Motorola Inc, Bank One Corp, Walgreen Co, Target Corp, American Express Co, and Honeywell International Inc. The overall economic outlook for the area is considered favorable. DEMOGRAPHICS We have reviewed demographic data within the neighborhood. The following table summarizes the key data points. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 12 SUN RIVER VILLAGE, TEMPE, AZ NEIGHBORHOOD DEMOGRAPHICS
AREA -------------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA ------------------------------------------------------------------------------------------------------ POPULATION TRENDS Current Population 21,091 130,459 305,109 3,441,350 5-Year Population 22,065 136,434 328,237 3,928,765 % Change CY-5Y 4.6% 4.6% 7.6% 14.2% Annual Change CY-5Y 0.9% 0.9% 1.5% 2.8% HOUSEHOLDS Current Households 8,915 51,500 119,744 1,259,651 5-Year Projected Households 9,266 54,127 128,428 1,426,007 % Change CY - 5Y 3.9% 5.1% 7.3% 13.2% Annual Change CY-5Y 0.8% 1.0% 1.5% 2.6% INCOME TRENDS Median Household Income $ 37,253 $ 44,396 $ 45,537 $ 44,128 Per Capita Income $ 20,250 $ 22,693 $ 23,490 $ 22,676 Average Household Income $ 47,970 $ 57,573 $ 60,039 $ 61,951
Source: Demographics Now The subject neighborhood's population is expected to show increases below that of the region. The immediate market offers inferior income levels as compared to the broader market. The following table illustrates the housing statistics in the subject's immediate area, as well as the MSA region. HOUSING TRENDS
AREA ---------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA ------------------------------------------------------------------------------------- HOUSING TRENDS % of Households Renting 53.98% 40.79% 41.24% 27.76% 5-Year Projected % Renting 51.33% 39.65% 39.72% 26.96% % of Households Owning 37.85% 51.28% 49.91% 60.59% 5-Year Projected % Owning 40.50% 52.52% 51.64% 62.26%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 SUN RIVER VILLAGE, TEMPE, AZ SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Retail Center, Apartments South - Condos, Homes, Apartments East - Office, Residential, Apartments West - Golf Course CONCLUSIONS The subject is well located within the city of Tempe. The neighborhood is characterized as being mostly suburban in nature and is currently in the stable stage of development. The economic outlook for the neighborhood is judged to be favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 14 SUN RIVER VILLAGE, TEMPE, AZ MARKET ANALYSIS The subject property is located in the city of Tempe in Maricopa County. The overall pace of development in the subject's market is more or less decreasing. The new construction that is being built is the Mark Taylor Community Apartments. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket -------------------------------------------------------------------- 1997 5.8% N/A 1998 6.3% N/A 1999 7.3% N/A 2000 6.9% N/A 2001 8.6% 8.9% 2002 10.5% 10.8% 2003 11.0% N/A
Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has equated the overall market. Market rents in the subject's market have been following a decreasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change ----------------------------------------------------------------------------- 1997 $598 - N/A - 1998 $626 4.7% N/A N/A 1999 $650 3.8% N/A N/A 2000 $676 4.0% N/A N/A 2001 $686 1.5% $733 - 2002 $691 0.7% $722 -1.5% 2003 $694 0.4% N/A N/A
{Source:} The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 SUN RIVER VILLAGE, TEMPE, AZ COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ------------------------------------------------------------------------------------------------------- R-1 La Contenta 472 87% 1985 0.5 miles from Subject R-2 Lake Front 244 90% 1974 0.4 miles from subject R-3 Wilshire Pine 173 87% 1975 1-mile south of the subject R-4 El Dorado N/A 95% 1983 Within 1 mile radius R-5 Somerset Village 276 95% 1982 within 1 mile of subject Subject Sun River Village 334 73% 1981
The rental rates of the submarket are similar to the region. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 SUN RIVER VILLAGE, TEMPE, AZ PROPERTY DESCRIPTION SITE ANALYSIS Site Area 14.3 acres, or 622,908 square feet Shape Generally rectangular Topography Level Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Good Flood Zone: Community Panel 04013C2165G, dated July 19, 2001 Flood Zone Zone A Zoning R-3, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ----------------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES -------------------------------------------------------------------------------------------------------------- 301-04-002-K $2,178,806 $10,503,800 $12,682,606 0.01176 $149,119
IMPROVEMENT ANALYSIS Year Built 1981 Number of Units 334 Net Rentable Area 286,180 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Stucco wall Roof Concrete, clay or ceramic tile over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, spa/jacuzzi, volleyball court, tennis court, jogging track, gym room, barbeque equipment, laundry room, and secured parking. Unit Amenities Individual unit amenities include a balcony, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal, washer/dryer, AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 SUN RIVER VILLAGE, TEMPE, AZ and oven. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) ----------------------------------------------------- 1Bd/1Ba 160 720 2Br/1Ba 56 846 2Br/2Ba 100 1,006 3Br/2Ba 12 1,194 3Br/2Ba 6 1,446
Overall Condition Average Effective Age 13 years Economic Life 45 years Remaining Economic Life 32 years Deferred Maintenance None HIGHEST AND BEST USE ANALYSIS In accordance with the definition of highest and best use, an analysis of the site relating to its legal uses, physical possibilities, and financial feasibility is appropriate. The highest and best use as vacant is to hold for future multi-family development. The subject improvements were constructed in 1981 and consist of a 334-unit multifamily project. The highest and best use as improved is for a continued multifamily use. Overall, the highest and best use of the subject property is the continued use of the existing apartment project. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 18 SUN RIVER VILLAGE, TEMPE, AZ THE VALUATION PROCEDURE There are three traditional approaches, which can be employed in establishing the market value of the subject property. These approaches and their applicability to the valuation of the subject are summarized as follows: THE COST APPROACH The application of the Cost Approach is based on the principle of substitution. This principle may be stated as follows: no one is justified in paying more for a property than that amount by which he or she can obtain, by purchase of a site and construction of a building, without undue delay, a property of equal desirability and utility. In the case of a new building, no deficiencies in the building should exist. In the case of income-producing real estate, the cost of construction plays a minor and relatively insignificant role in determining market value. The Cost Approach is typically only a reliable indicator of value for: (a) new properties; (b) special use properties; and (c) where the cost of reproducing the improvements is easily and accurately quantified and there is no economic obsolescence. In all instances, the issue of an appropriate entrepreneurial profit - the reward for undertaking the risk of construction, remains a highly subjective factor especially in a market lacking significant speculative development. THE SALES COMPARISON APPROACH The Sales Comparison Approach is an estimate of value based upon a process of comparing recent sales of similar properties in the surrounding or competing areas to the subject property. Inherent in this approach is the principle of substitution. The application of this approach consists of comparing the subject property with similar properties of the same general type, which have been sold recently or currently are available for sale in competing areas. This comparative process involves judgment as to the similarity of the subject property and the comparable sale with respect to many value factors such as location, contract rent levels, quality of construction, reputation and prestige, age and condition, among others. The estimated value through this approach represents the probable price at which a willing seller would sell the subject property to a willing and knowledgeable buyer as of the date of value. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 19 SUN RIVER VILLAGE, TEMPE, AZ THE INCOME CAPITALIZATION APPROACH The theory of the Income Capitalization Approach is based on the premise that present value is the value of the cash flow and reversionary value the property will produce over a reasonable holding (ownership) period. The Discounted Cash Flow Analysis will convert equity cash flows (including cash flows and equity reversion) into a present value utilizing an internal rate of return (or discount rate). The Internal Rate of Return (IRR) will be derived from a comparison of alternate investments, a comparative analysis of IRR's used by recent buyers of similar properties, and a review of published industry surveys. The Direct Capitalization Analysis converts one year of income into an overall value using overall capitalization rates from similar sales. The overall rates take into consideration buyers assumptions of the market over the long-term. The results of the Income Capitalization Analysis are usually the primary value indicator for income producing properties. Investors expect a reasonable rate of return on their equity investment based on the ownership risks involved; this approach closely parallels the investment decision process. RECONCILIATION In this instance, we have completed the Sales Comparison and Income Capitalization Approaches to value. As an income producing property, the income approach is a primary approach to value. The Sales Comparison Approach is also considered reliable as investors are buying similar buildings in the market. Our research indicates that market participants are generally not buying, selling, investing, or lending with reliance placed on the methodology of the Cost Approach to establish the value. Therefore, we have decided that the Cost Approach is not a reliable indicator of value for the subject, and this approach has not been utilized. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 20 SUN RIVER VILLAGE, TEMPE, AZ SALES COMPARISON APPROACH Use of market or comparable sales requires the collection and analysis of comparable sales data. Similar properties recently sold are compared to the subject and adjusted based on any perceived differences. This method is based on the premise that the costs of acquiring a substitute property would tend to establish a value for the subject property. The premise suggests that if a substitute is unavailable in the market, the reliability of the approach may be subordinate to the other approaches. The reliance on substitute properties produces shortcomings in the validity of this approach. Geographic and demographic characteristics from each submarket restrict which sales may be selected. Recent sales with a similar physical characteristics, income levels, and location are usually limited. The sales we have identified, however, do establish general valuation parameters as well as provide support to our conclusion derived through the income approach method. The standard unit of comparison among similar properties is the sales price per unit and price per square foot of net rentable area. To accurately adjust prices to satisfy the requirements of the sales comparison approach, numerous calculations and highly subjective judgments would be required including consideration of numerous income and expense details for which information may be unreliable or unknown. The sales price per unit and square foot are considered relevant to the investment decision, but primarily as a parameter against which value estimates derived through the income approach can be judged and compared. In examining the comparable sales, we have applied a subjective adjustment analysis, which includes specific adjustments derived from our experience and consulting with the market participants. SALES COMPARISON ANALYSIS Detailed on the following pages are sales transactions involving properties located in the subject's competitive investment market. Photographs of the sale transactions are located in the Addenda. Following the summary of sales is an adjustment grid that is used to arrive at a value. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 21 SUN RIVER VILLAGE, TEMPE, AZ SUMMARY OF COMPARABLE SALES-IMPROVED
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 I - 3 ------------------------------------------------------------------------------------------------------------------------------------ Property Name Sun River Village Lakeview at Superstition The Ridge Indigo Springs LOCATION: Address 605 W. Baseline 1849 S. Power 15202 N. 40th St 1464 S. Stapley Dr Rd. City, State Tempe, AZ Mesa, AZ 85206 Phoenix, AZ Mesa, AZ 85204 85032 County Maricopa Maricopa Maricopa Maricopa PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 286,180 650,392 278,424 222,870 Year Built 1981 1995 1986 1999 Number of Units 334 676 380 240 Unit Mix: Type Total Type Total Type Total Type Total 1Bd/1Ba 160 1Br/1Ba 230 Studio 44 1BR 90 2Br/1Ba 56 2Br/2Ba 374 1BR 168 2BR 120 2Br/2Ba 100 3Br/2Ba 72 2BR 168 3BR 30 3Br/2Ba 12 3Br/2Ba 6 Average Unit Size (SF) 857 962 733 929 Land Area (Acre) 14.3000 38.0000 13.1100 9.8000 Density (Units/Acre) 23.4 17.8 29.0 24.5 Parking Ratio (Spaces/Unit) 1.35 1.55 1.40 2.03 Parking Type (Gr., Cov., Garage, Open Open, Covered Open, Covered Open, Covered etc.) Covered CONDITION: Good Good Average Very Good APPEAL: Good Good Average Very Good AMENITIES: Pool/Spa Yes/Yes Gym Room Yes Laundry Room Yes Secured Parking Yes Sport Courts No Washer/Dryer Connection Yes OCCUPANCY: 73% 86% 97% N/A TRANSACTION DATA: Sale Date December, 2002 December, 2002 August, 2002 Sale Price ($) $48,250,000 $17,800,000 $18,500,000 Grantor Mesa 306 LLC Archstone-Smith Indigo Springs Operating LLC Trust Grantee Nearon Lakeview LLC Indigo Acquisitions LLC Sale Documentation Verification Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $7,116,416 $10,527 $10.94 $ 0 $ 0 $0.00 $0 $0 $0.00 Vacancy/Credit Loss $ 994,163 $ 1,471 $ 1.53 $ 0 $ 0 $0.00 $0 $0 $0.00 Effective Gross Income $6,122,253 $ 9,057 $ 9.41 $ 0 $ 0 $0.00 $0 $0 $0.00 Operating Expenses $2,239,524 $ 3,313 $ 3.44 $ 0 0 $0.00 $0 $0 $0.00 Net Operating Income $3,882,779 $ 5,744 $ 5.97 $1,379,500 $3,630 $4.95 $0 $0 $0.00 NOTES: None None None PRICE PER UNIT $71,376 $46,842 $77,083 PRICE PER SQUARE FOOT $ 74.19 $ 63.93 $ 83.01 EXPENSE RATIO 36.6% N/A N/A EGIM 7.88 N/A N/A OVERALL CAP RATE 8.05% 7.75% N/A Cap Rate based on Pro Forma or PRO FORMA ACTUAL Actual Income? COMPARABLE COMPARABLE DESCRIPTION I - 4 I - 5 ---------------------------------------------------------------------------------- Property Name Paradise Falls Apartments The Commons at Papago Park LOCATION: Address 15611 N 31st St 1010 N 48th St City, State Phoenix, AZ 85032 Phoenix, AZ County Maricopa Maricopa PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 171,845 120,000 Year Built 1986 1982 Number of Units 220 200 Unit Mix: Type Total Type Total 1BR 108 1BR 100 2BR 112 2BR 100 Average Unit Size (SF) 781 600 Land Area (Acre) 7.7600 4.7400 Density (Units/Acre) 28.4 42.2 Parking Ratio (Spaces/Unit) 1.36 1.33 Parking Type (Gr., Cov., etc.) Open, Covered Open, Covered CONDITION: Very Good Average APPEAL: Very Good Average AMENITIES: Pool/Spa Gym Room Laundry Room Secured Parking Sport Courts Washer/Dryer Connection OCCUPANCY: 86% N/A TRANSACTION DATA: Sale Date February, 2003 August, 2002 Sale Price ($) $9,800,000 $4,700,000 Grantor SWP Los Verdes LLC Properties I Grantee Paradise Falls N/A Sale Documentation Verification Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $ 1,700,00 $7,727 $9.89 $0 $0 $0.00 Vacancy/Credit Loss $ 244,80 $1,113 $1.42 $0 $0 $0.00 Effective Gross Income $1,455,200 $6,615 $8.47 $0 $0 $0.00 Operating Expenses $ 660,00 $3,000 $3.84 $0 $0 $0.00 Net Operating Income $ 795,200 $3,615 $4.63 $0 $0 $0.00 NOTES: None None PRICE PER UNIT $44,545 $23,500 PRICE PER SQUARE FOOT $ 57.03 $ 39.17 EXPENSE RATIO 45.4% N/A EGIM 6.73 N/A OVERALL CAP RATE 8.11% N/A Cap Rate based on Pro Forma or Actual Income? PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 SUN RIVER VILLAGE, TEMPE, AZ IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $23,500 to $77,083 per unit. Adjustments have been made to the sales to reflect differences in location, age/condition and quality/appeal. Generally speaking, larger properties typically have a lower price per unit when compared to smaller properties, all else being equal. Similarly, those projects with a higher average unit size will generally have a higher price per unit. After appropriate adjustments are made, the improved sales demonstrate an adjusted range for the subject from $38,542 to $42,318 per unit with a mean or average adjusted price of $40,673 per unit. The median adjusted price is $41,090 per unit. Based on the following analysis, we have concluded to a value of $41,000 per unit, which results in an "as is" value of $13,100,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 SUN RIVER VILLAGE, TEMPE, AZ SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 I - 3 ------------------------------------------------------------------------------------------------------------------------------ Property Name Sun River Village Lakeview at The Ridge Indigo Springs Superstition Address 605 W. Baseline 1849 S. Power Rd. 15202 N. 40th St 1464 S. Stapley Dr City Tempe, AZ Mesa, AZ 85206 Phoenix, AZ 8502 Mesa, AZ 85204 Sale Date December, 2002 December, 2002 August, 2002 Sale Price ($) $48,250,000 $17,800,000 $18,500,000 Net Rentable Area (SF) 286,180 650,392 278,424 222,870 Number of Units 334 676 380 240 Price Per Unit $71,376 $46,842 $77,083 Year Built 1981 1995 1986 1999 Land Area (Acre) 14.3000 38.0000 13.1100 9.8000 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple 0% Fee Simple 0% Fee Simple 0% Estate Estate Estate Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 12-2002 0% 12-2002 0% 08-2002 0% VALUE AFTER TRANS. ADJUST. $71,376 $46,842 $77,083 ($/UNIT) Location Superior -20% Superior -5% Superior -20% Number of Units 334 676 0% 380 0% 240 0% Quality / Appeal Good Superior -10% Superior -10% Superior -15% Age / Condition 1981 1995 / Good -10% 1986 / Average 0% 1999 / Very -10% Good Occupancy at Sale 73% 86% 0% 97% 0% N/A 0% Amenities Good Comparable 0% Comparable 0% Superior -5% Average Unit Size (SF) 857 962 -5% 733 5% 929 0% PHYSICAL ADJUSTMENT -45% -10% -50% FINAL ADJUSTED VALUE ($/UNIT) $39,257 $42,158 $38,542 COMPARABLE COMPARABLE DESCRIPTION I - 4 I - 5 ------------------------------------------------------------------------------------- Property Name Paradise Falls The Commons at Papago Park Apartments Address 15611 N 31st St 1010 N 48th St City Phoenix, AZ 85032 Phoenix, AZ Sale Date February, 2003 August, 2002 Sale Price ($) $9,800,000 $4,700,000 Net Rentable Area (SF) 171,845 120,000 Number of Units 220 200 Price Per Unit $44,545 $23,500 Year Built 1986 1982 Land Area (Acre) 7.7600 4.7400 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple 0% Fee Simple 0% Estate Estate Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 02-2003 0% August, 2002 0% VALUE AFTER TRANS. ADJUST. $44,545 $23,500 ($/UNIT) Location Superior -15% Inferior 20% Number of Units 220 0% 200 0% Quality / Appeal Comparable 0% Inferior 20% Age / Condition 1986 / Very Good 0% 1982 / Average 0% Occupancy at Sale 86% 0% N/A 0% Amenities Inferior 10% Inferior 20% Average Unit Size (SF) 781 0% 600 15% PHYSICAL ADJUSTMENT -5% 75% FINAL ADJUSTED VALUE ($/UNIT) $42,318 $41,090
SUMMARY VALUE RANGE (PER UNIT) $ 38,542 TO $ 42,318 MEAN (PER UNIT) $ 40,673 MEDIAN (PER UNIT) $ 41,090 VALUE CONCLUSION (PER UNIT) $ 41,000
VALUE OF IMPROVEMENT & MAIN SITE $13,694,000 LESS: LEASE-UP COST -$ 371,000 PV OF CONCESSIONS -$ 186,000 VALUE INDICATED BY SALES COMPARISON APPROACH $13,137,000 ROUNDED $13,100,000
NET OPERATING INCOME (NOI) ANALYSIS We have also conducted a net operating income (NOI) comparison analysis. The NOI effectively takes into account the various physical, location, and operating aspects of the sale. When the subject's NOI is compared to the sale NOI, a percent adjustment can be arrived at. The following table illustrates this analysis. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 SUN RIVER VILLAGE, TEMPE, AZ NOI PER UNIT COMPARISON
SALE PRICE NOI/ SUBJECT NOI COMPARABLE NO. OF ----------- ---------- -------------- ADJUSTMENT INDICATED NO. UNITS PRICE/UNIT OAR NOI/UNIT SUBJ. NOI/UNIT FACTOR VALUE/UNIT -------------------------------------------------------------------------------------------------------------------- I-1 676 $48,250,000 8.05% $3,882,729 $ 1,206,555 0.629 $44,891 $ 71,376 $ 5,744 $ 3,612 I-2 380 $17,800,000 7.75% $1,379,500 $ 1,206,555 0.995 $46,612 $ 46,842 $ 3,630 $ 3,612 I-3 240 $18,500,000 0.00% $ 1,206,555 $ 77,083 $ 3,612 I-4 220 $ 9,800,000 8.11% $ 795,200 $ 1,206,555 0.999 $44,520 $ 44,545 $ 3,615 $ 3,612 I-5 200 $ 4,700,000 0.00% $ 1,206,555 $ 23,500 $ 3,612
PRICE/UNIT Low High Average Median --- ---- ------- ------ $44,520 $46,612 $45,341 $44,891
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 45,000 ----------- Number of Units 334 Value $15,030,000 Less: Lease-Up Cost -$ 371,000 PV of Concessions -$ 186,000 ----------- Value Based on NOI Analysis $14,473,000 Rounded $14,500,000
The adjusted sales indicate a range of value between $44,520 and $46,612 per unit, with an average of $45,341 per unit. Based on the subject's competitive position within the improved sales, a value of $45,000 per unit is estimated. This indicates an "as is" market value of $14,500,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 SUN RIVER VILLAGE, TEMPE, AZ EFFECTIVE GROSS INCOME MULTIPLIER COMPARISON
SALE PRICE COMPARABLE NO. OF ---------- EFFECTIVE OPERATING SUBJECT NO. UNITS PRICE/UNIT GROSS INCOME EXPENSE OER PROJECTED OER EGIM ------------------------------------------------------------------------------------------------------------------ I-1 676 $48,250,000 $ 6,122,253 $2,239,524 36.58% 7.88 $ 71,376 I-2 380 $17,800,000 $ 46,842 I-3 240 $18,500,000 44.70% $ 77,083 I-4 220 $ 9,800,000 $ 1,455,200 $ 660,000 45.35% 6.73 $ 44,545 I-5 200 $ 4,700,000 $ 23,500
EGIM Low High Average Median --- ---- ------- ------ 6.73 7.88 7.31 7.31
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 6.75 ----------- Subject EGI $ 2,302,645 Value $15,542,855 Less: Lease-Up Cost -$ 371,000 PV of Concessions -$ 186,000 ----------- Value Based on EGIM Analysis $14,985,855 Rounded $15,000,000 Value Per Unit $ 44,910
There is an inverse relationship, which generally holds among EGIMs and operating expenses. Properties, which have higher expense ratios, typically sell for relatively less and therefore produce a lower EGIM. As will be illustrated in the Income Capitalization Approach of this report, the subject's operating expense ratio (OER) is estimated at 44.70% before reserves. The comparable sales indicate a range of expense ratios from 36.58% to 45.35%, while their EGIMs range from 6.73 to 7.88. Overall, we conclude to an EGIM of 6.75, which results in an "as is" value estimate in the EGIM Analysis of $15,000,000. SALES COMPARISON CONCLUSION The three valuation methods in the Sales Comparison Approach are shown below. The overall value via the Sales Comparison Approach is estimated at $13,500,000. Price Per Unit $13,100,000 NOI Per Unit $14,500,000 EGIM Analysis $15,000,000 Sales Comparison Conclusion $13,500,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 SUN RIVER VILLAGE, TEMPE, AZ INCOME CAPITALIZATION APPROACH The income capitalization approach is based on the premise that value is created by the expectation of future benefits. We estimated the present value of those benefits to derive an indication of the amount that a prudent, informed purchaser-investor would pay for the right to receive them as of the date of value. This approach requires an estimate of the NOI of a property. The estimated NOI is then converted to a value indication by use of either the direct capitalization or the discounted cash flow analysis (yield capitalization). Direct capitalization uses a single year's stabilized NOI as a basis for a value indication by dividing the income by a capitalization rate. The rate chosen accounts for a recapture of the investment by the investor and should reflect all factors that influence the value of the property, such as tenant quality, property condition, neighborhood change, market trends, interest rates, and inflation. The rate may be extracted from local market transactions or, when transaction evidence is lacking, obtained from trade sources. A discounted cash flow analysis focuses on the operating cash flows expected from the property and the proceeds of a hypothetical sale at the end of a holding period (the reversion). The cash flows and reversion are discounted to their present values using a market-derived discount rate and are added together to obtain a value indication. Because benefits to be received in the future are worth less than the same benefits received in the present, this method weights income in the early years more heavily than the income and the sale proceeds to be received later. The strength of the discounted cash flow method is its ability to recognize variations in projected net income, such as those caused by inflation, stepped leases, neighborhood change, or tenant turnover. Its weakness is that it requires many judgments regarding the actions of likely buyers and sellers of the property in the future. In some situations, both methods yield a similar result. The discounted cash flow method is typically more appropriate for the analysis of investment properties with multiple or long-term leases, particularly leases with cancellation clauses or renewal options. It is especially useful for multi-tenant properties in volatile markets. The direct capitalization AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 27 SUN RIVER VILLAGE, TEMPE, AZ method is normally more appropriate for properties with relatively stable operating histories and expectations. A pro forma analysis for the first year of the investment is made to estimate a reasonable potential net operating income for the Subject Property. Such an analysis entails an estimate of the gross income the property should command in the marketplace. From this total gross income must be deducted an allowance for vacancy/collection loss and operating expenses as dictated by general market conditions and the overall character of the subject's tenancy and leased income to arrive at a projected estimate of net operating income. Conversion of the net operating income to an indication of value is accomplished by the process of capitalization, as derived primarily from market data. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a survey of competing apartment communities was performed. This survey was displayed previously in the market analysis section of the report. Detailed information pertaining to each of the comparable rental communities, along with photographs, is presented in the Addenda of this report. The following charts display the subject's current asking and actual rent rates as well as a comparison with the previous referenced comparable rental properties. SUMMARY OF ACTUAL AVERAGE RENTS
Average Unit Area --------------------- Unit Type (Sq. Ft.) Per Unit Per SF %Occupied -------------------------------------------------------------------------------- 1Bd/1Ba 720 $ 539 $ 0.75 76.9% 2Br/1Ba 846 $ 611 $ 0.72 60.7% 2Br/2Ba 1006 $ 683 $ 0.68 69.0% 3Br/2Ba 1194 $ 869 $ 0.73 91.7% 3Br/2Ba 1446 $1,068 $ 0.74 100.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 SUN RIVER VILLAGE, TEMPE, AZ RENT ANALYSIS
COMPARABLE RENTS ---------------- R-1 R-2 R-3 R-4 R-5 ------------------------------------------------------- Wilshire Somerset La Contenta Lake Front Pine El Dorado Village ------------------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ------------------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Superior Superior Superior Superior Superior ------------------------------------------------------------------------------------------------------------------- Monthly Rent 1Bd/1Bd $ 539 $ 569 $ 630 $ 650 $ 565 $ 560 $ 575 Unit Area (SF) 720 720 720 755 710 720 720 Monthly Rent Per Sq. Ft. $ 0.75 $ 0.79 $ 0.88 $ 0.86 $ 0.80 $ 0.78 $ 0.80 Monthly Rent 2Br/1Ba $ 611 $ 679 $ 675 $ 675 $ 650 $ 670 $ 645 Unit Area (SF) 846 846 840 855 890 840 840 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.80 $ 0.80 $ 0.79 $ 0.73 $ 0.80 $ 0.77 Monthly Rent 2Br/2Ba $ 683 $ 739 $ 774 $ 800 $ 680 $ 690 Unit Area (SF) 1,006 1,006 1,022 990 1,006 1,006 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.73 $ 0.76 $ 0.81 $ 0.68 $ 0.69 Monthly Rent 3Br/2Ba $ 869 $ 999 $ 865 $ 825 Unit Area (SF) 1,194 1,194 1,200 1,192 Monthly Rent Per Sq. Ft. $ 0.73 $ 0.84 $ 0.72 $ 0.69 Monthly Rent 3Br/2Ba $ 1,068 $ 1,099 $ 1,025 $ 955 $ 1,050 Unit Area (SF) 1,446 1,446 1,330 1,500 1,444 Monthly Rent Per Sq. Ft. $ 0.74 $ 0.76 $ 0.77 $ 0.64 $ 0.73 DESCRIPTION MIN MAX MEDIAN AVERAGE ------------------------------------------------------------------- Monthly Rent $ 560 $ 650 $ 575 $ 596 Unit Area (SF) 710 755 720 725 Monthly Rent Per Sq. Ft. $ 0.78 $ 0.88 $ 0.80 $ 0.82 Monthly Rent $ 645 $ 675 $ 670 $ 663 Unit Area (SF) 840 890 840 853 Monthly Rent Per Sq. Ft. $ 0.73 $ 0.80 $ 0.79 $ 0.78 Monthly Rent $ 680 $ 800 $ 732 $ 736 Unit Area (SF) 990 1,022 1,006 1,006 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.81 $ 0.72 $ 0.73 Monthly Rent $ 825 $ 865 $ 845 $ 845 Unit Area (SF) 1,192 1,200 1,196 1,196 Monthly Rent Per Sq. Ft. $ 0.69 $ 0.72 $ 0.71 $ 0.71 Monthly Rent $ 955 $1,050 $1,025 $1,010 Unit Area (SF) 1,330 1,500 1,444 1,425 Monthly Rent Per Sq. Ft. $ 0.64 $ 0.77 $ 0.73 $ 0.71
CONCLUDED MARKET RENTAL RATES AND TERMS Based on this analysis above, the subject's concluded market rental rates and gross rental income is calculated as follows: GROSS RENTAL INCOME PROJECTION
Market Rent Unit Area ----------------- Monthly Annual Unit Type Number of Units (Sq. Ft.) Unit Per Per SF Income Income ------------------------------------------------------------------------------------------------- 1Bd/1Ba 160 720 $ 550 $ 0.76 $ 88,000 $1,056,000 2Br/1Ba 56 846 $ 615 $ 0.73 $ 34,440 $ 413,280 2Br/2Ba 100 1,006 $ 683 $ 0.68 $ 68,300 $ 819,600 3Br/2Ba 12 1,194 $ 869 $ 0.73 $ 10,428 $ 125,136 3Br/2Ba 6 1,446 $ 1,068 $ 0.74 $ 6,408 $ 76,896 ------------------------------------ Total $ 207,576 $2,490,912
PRO FORMA ANALYSIS For purposes of this appraisal, we were provided with income and expense data for the subject property. A summary of this data is presented on the following page. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 SUN RIVER VILLAGE, TEMPE, AZ SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 ---------------------------- ---------------------------- ----------------------------- ACTUAL ACTUAL ACTUAL ---------------------------- ---------------------------- ----------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT ------------------------------------------------------------------------------------------------------------------------------- Revenues Rental Income $2,595,377 $ 7,771 $2,652,734 $ 7,942 $2,539,916 $ 7,605 Vacancy $ 209,780 $ 628 $ 164,508 $ 493 $ 362,432 $ 1,085 Credit Loss/Concessions $ 72,754 $ 218 $ 135,701 $ 406 $ 201,406 $ 603 --------------------------------------------------------------------------------------------- Subtotal $ 282,534 $ 846 $ 300,209 $ 899 $ 563,838 $ 1,688 Laundry Income $ 24,818 $ 74 $ 21,317 $ 64 $ 22,327 $ 67 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 105,153 $ 315 $ 142,176 $ 426 $ 164,706 $ 493 --------------------------------------------------------------------------------------------- Subtotal Other Income $ 129,971 $ 389 $ 163,493 $ 490 $ 187,033 $ 560 --------------------------------------------------------------------------------------------- Effective Gross Income $2,442,814 $ 7,314 $2,516,018 $ 7,533 $2,163,111 $ 6,476 Operating Expenses Taxes $ 154,026 $ 461 $ 140,056 $ 419 $ 149,529 $ 448 Insurance $ 35,754 $ 107 $ 44,031 $ 132 $ 49,468 $ 148 Utilities $ 146,654 $ 439 $ 133,126 $ 399 $ 142,329 $ 426 Repair & Maintenance $ 97,564 $ 292 $ 135,976 $ 407 $ 130,977 $ 392 Cleaning $ 73,251 $ 219 $ 72,205 $ 216 $ 76,917 $ 230 Landscaping $ 50,854 $ 152 $ 39,108 $ 117 $ 50,946 $ 153 Security $ 6,404 $ 19 $ 10,059 $ 30 $ 6,812 $ 20 Marketing & Leasing $ 55,941 $ 167 $ 47,387 $ 142 $ 47,742 $ 143 General Administrative $ 358,301 $ 1,073 $ 347,175 $ 1,039 $ 274,650 $ 822 Management $ 124,149 $ 372 $ 128,632 $ 385 $ 111,082 $ 333 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------------------- Total Operating Expenses $1,102,898 $ 3,302 $1,097,755 $ 3,287 $1,040,452 $ 3,115 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------------------- Net Income $1,339,916 $ 4,012 $1,418,263 $ 4,246 $1,122,659 $ 3,361 FISCAL YEAR 2003 ANNUALIZED 2003 ---------------------------- ----------------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION ---------------------------- ----------------------------- ---------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % ------------------------------------------------------------------------------------------------------------------------------------ Revenues Rental Income $2,477,655 $ 7,418 $2,521,064 $ 7,548 $2,490,912 $ 7,458 100.0% Vacancy $ 168,075 $ 503 $ 676,956 $ 2,027 $ 249,091 $ 746 10.0% Credit Loss/Concessions $ 95,620 $ 286 $ 193,328 $ 579 $ 124,546 $ 373 5.0% ----------------------------------------------------------------------------------------------------- Subtotal $ 263,695 $ 790 $ 870,284 $ 2,606 $ 373,637 $ 1,119 15.0% Laundry Income $ 23,880 $ 71 $ 20,128 $ 60 $ 18,370 $ 55 0.7% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 164,630 $ 493 $ 195,796 $ 586 $ 167,000 $ 500 6.7% ----------------------------------------------------------------------------------------------------- Subtotal Other Income $ 188,510 $ 564 $ 215,924 $ 646 $ 185,370 $ 555 7.4% ----------------------------------------------------------------------------------------------------- Effective Gross Income $2,402,470 $ 7,193 $1,866,704 $ 5,589 $2,302,645 $ 6,894 100.0% Operating Expenses Taxes $ 130,034 $ 389 $ 132,876 $ 398 $ 149,298 $ 447 6.5% Insurance $ 55,334 $ 166 $ 54,004 $ 162 $ 50,100 $ 150 2.2% Utilities $ 139,283 $ 417 $ 131,904 $ 395 $ 133,600 $ 400 5.8% Repair & Maintenance $ 79,890 $ 239 $ 112,424 $ 337 $ 126,920 $ 380 5.5% Cleaning $ 55,500 $ 166 $ 36,224 $ 108 $ 66,800 $ 200 2.9% Landscaping $ 87,900 $ 263 $ 48,140 $ 144 $ 50,100 $ 150 2.2% Security $ 0 $ 0 $ 9,244 $ 28 $ 6,680 $ 20 0.3% Marketing & Leasing $ 49,650 $ 149 $ 77,796 $ 233 $ 46,760 $ 140 2.0% General Administrative $ 288,913 $ 865 $ 295,884 $ 886 $ 283,900 $ 850 12.3% Management $ 119,401 $ 357 $ 106,660 $ 319 $ 115,132 $ 345 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% ----------------------------------------------------------------------------------------------------- Total Operating Expenses $1,005,905 $ 3,012 $1,005,156 $ 3,009 $1,029,290 $ 3,082 44.7% Reserves $ 0 $ 0 $ 0 $ 0 $ 66,800 $ 200 6.5% ----------------------------------------------------------------------------------------------------- Net Income $1,396,565 $ 4,181 $ 861,548 $ 2,579 $1,206,555 $ 3,612 52.4%
REVENUES AND EXPENSES The subject's revenue and expense projections are displayed on the previous chart. Rental income is based on the market analysis previously discussed. Other income consists of forfeited deposits, laundry income, late rent payments, month to month fees, pet fees, vending machine revenue, etc. We forecasted the property's annual operating expenses after reviewing its historical performance at the subject property. We analyzed each item of expense and attempted to forecast amounts a typical informed investor would consider reasonable. VACANCY AND COLLECTION LOSS An investor is primarily interested in the annual revenue an income property is likely to produce over a specified period of time, rather than the income it could produce if it were always 100% occupied and all tenants were paying their rent in full and on time. An investor normally expects some income loss as tenants vacate, fail to pay rent, or pay their rent late. We have projected a stabilized vacancy and collection loss rate of 15% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 SUN RIVER VILLAGE, TEMPE, AZ RESERVES FOR REPLACEMENT "Reserves for replacements" is a contingency account allocated to the expenses of the property to provide for replacement of short-lived items and for unforeseen necessary capital expenditures. We have utilized the Korpacz Real Estate Investor Survey of the national apartment market, which reports a range of replacement reserves between $150 and $400 per unit. For purposes of this analysis, we have included an allowance of $200 per unit for reserves for replacement. CAPITAL EXPENDITURES Capital expenditures represent expenses for immediate repair or replacement of items that have average to long lives. Based on our inspection of the property as well as discussions with property management personnel, there are no major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an allowance of $200 per unit should be satisfactory in our reserves for replacement to cover future capital expenditures. DISCOUNTED CASH FLOW ANALYSIS As the subject is a multi-tenant income property, the Discounted Cash Flow Method is considered appropriate. This method is especially meaningful in that it isolates the timing of the annual cash flows and discounts them, along with the expected equity reversion, to a present value. The present value of the cash flow is added to the present value of the reversion, resulting in a total property value. INVESTMENT CRITERIA Appropriate investment criteria will be derived for the subject based upon analysis of comparable sales and a survey of real estate investors. The following table summarizes the findings of Korpacz National Investor Survey for the most recent period. KORPACZ NATIONAL INVESTOR SURVEY 1ST QUARTER 2003 NATIONAL APARTMENT MARKET
CAPITALIZATION RATES ---------------------------------------------------------------- GOING-IN TERMINAL -------- -------- LOW HIGH LOW HIGH ---------------------------------------------------------------------------------- RANGE 6.00% 10.00% 7.00% 10.00% AVERAGE 8.14% 8.47%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 SUN RIVER VILLAGE, TEMPE, AZ SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR ------------------------------------------------------------------------- I-1 Dec-02 86% $71,376 8.05% I-2 Dec-02 97% $46,842 7.75% I-3 Aug-02 N/A $77,083 N/A I-4 Feb-03 86% $44,545 8.11% I-5 August, 2002 N/A $23,500 N/A High 8.11% Low - Average 7.97%
Based on this information, we have concluded the subject's overall capitalization rate should be 9.00%. The terminal capitalization rate is applied to the net operating income estimated for the year following the end of the holding period. Based on the concluded overall capitalization rate, the age of the property and the surveyed information, we have concluded the subject's terminal capitalization rate to be 9.50%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 12.00%. HOLDING PERIOD The survey of investors indicates that most investors are completing either 10-year cash flows or extending the analysis to the end of the lease if it is more than 10-years. A 10-year period has been used in the analysis of the subject with the eleventh year stabilized NOI used to determine the reversion. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 2.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 12.00% indicates a value of $12,900,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 SUN RIVER VILLAGE, TEMPE, AZ approximately 42% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 SUN RIVER VILLAGE, TEMPE, AZ DISCOUNTED CASH FLOW ANALYSIS SUN RIVER VILLAGE
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ----------------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,490,912 $2,565,639 $2,642,609 $2,721,887 $2,803,543 $2,887,650 Vacancy $ 580,011 $ 376,321 $ 264,261 $ 272,189 $ 280,354 $ 288,765 Credit Loss $ 124,546 $ 128,282 $ 132,130 $ 136,094 $ 140,177 $ 144,382 Concessions $ 208,416 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------------ Subtotal $ 912,973 $ 504,603 $ 396,391 $ 408,283 $ 420,532 $ 433,147 Laundry Income $ 18,370 $ 18,921 $ 19,489 $ 20,073 $ 20,676 $ 21,296 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 167,000 $ 172,010 $ 177,170 $ 182,485 $ 187,960 $ 193,599 ------------------------------------------------------------------------------------------ Subtotal Other Income $ 185,370 $ 190,931 $ 196,659 $ 202,559 $ 208,636 $ 214,895 ------------------------------------------------------------------------------------------ EFFECTIVE GROSS INCOME $1,763,309 $2,251,967 $2,442,876 $2,516,163 $2,591,647 $2,669,397 OPERATING EXPENSES: Taxes $ 149,298 $ 153,777 $ 158,390 $ 163,142 $ 168,036 $ 173,077 Insurance $ 50,100 $ 51,603 $ 53,151 $ 54,746 $ 56,388 $ 58,080 Utilities $ 133,600 $ 137,608 $ 141,736 $ 145,988 $ 150,368 $ 154,879 Repair & Maintenance $ 126,920 $ 130,728 $ 134,649 $ 138,689 $ 142,850 $ 147,135 Cleaning $ 66,800 $ 68,804 $ 70,868 $ 72,994 $ 75,184 $ 77,440 Landscaping $ 50,100 $ 51,603 $ 53,151 $ 54,746 $ 56,388 $ 58,080 Security $ 6,680 $ 6,880 $ 7,087 $ 7,299 $ 7,518 $ 7,744 Marketing & Leasing $ 46,760 $ 48,163 $ 49,608 $ 51,096 $ 52,629 $ 54,208 General Administrative $ 283,900 $ 292,417 $ 301,190 $ 310,225 $ 319,532 $ 329,118 Management $ 88,165 $ 112,598 $ 122,144 $ 125,808 $ 129,582 $ 133,470 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES $1,002,323 $1,054,181 $1,091,974 $1,124,733 $1,158,475 $1,193,230 Reserves $ 66,800 $ 68,804 $ 70,868 $ 72,994 $ 75,184 $ 77,440 ------------------------------------------------------------------------------------------ NET OPERATING INCOME $ 694,185 $1,128,982 $1,280,034 $1,318,435 $1,357,988 $1,398,728 ----------------------------------------------------------------------------------------------------------------------------------- Operating Expense Ratio (% of EGI) 56.8% 46.8% 44.7% 44.7% 44.7% 44.7% Operating Expense Per Unit $ 3,001 $ 3,156 $ 3,269 $ 3,367 $ 3,468 $ 3,573 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 -------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,974,279 $3,063,508 $3,155,413 $3,250,075 $3,347,577 Vacancy $ 297,428 $ 306,351 $ 315,541 $ 325,008 $ 334,758 Credit Loss $ 148,714 $ 153,175 $ 157,771 $ 162,504 $ 167,379 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------- Subtotal $ 446,142 $ 459,526 $ 473,312 $ 487,511 $ 502,137 Laundry Income $ 21,935 $ 22,593 $ 23,271 $ 23,969 $ 24,688 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 199,407 $ 205,389 $ 211,551 $ 217,897 $ 224,434 --------------------------------------------------------------------------- Subtotal Other Income $ 221,341 $ 227,982 $ 234,821 $ 241,866 $ 249,122 --------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $2,749,479 $2,831,963 $2,916,922 $3,004,430 $3,094,563 OPERATING EXPENSES: Taxes $ 178,270 $ 183,618 $ 189,126 $ 194,800 $ 200,644 Insurance $ 59,822 $ 61,617 $ 63,465 $ 65,369 $ 67,330 Utilities $ 159,525 $ 164,311 $ 169,240 $ 174,318 $ 179,547 Repair & Maintenance $ 151,549 $ 156,096 $ 160,778 $ 165,602 $ 170,570 Cleaning $ 79,763 $ 82,156 $ 84,620 $ 87,159 $ 89,774 Landscaping $ 59,822 $ 61,617 $ 63,465 $ 65,369 $ 67,330 Security $ 7,976 $ 8,216 $ 8,462 $ 8,716 $ 8,977 Marketing & Leasing $ 55,834 $ 57,509 $ 59,234 $ 61,011 $ 62,842 General Administrative $ 338,991 $ 349,161 $ 359,636 $ 370,425 $ 381,538 Management $ 137,474 $ 141,598 $ 145,846 $ 150,221 $ 154,728 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $1,229,026 $1,265,897 $1,303,874 $1,342,990 $1,383,280 Reserves $ 79,763 $ 82,156 $ 84,620 $ 87,159 $ 89,774 --------------------------------------------------------------------------- NET OPERATING INCOME $1,440,690 $1,483,910 $1,528,428 $1,574,281 $1,621,509 -------------------------------------------------------------------------------------------------------------------- Operating Expense Ratio (% of EGI) 44.7% 44.7% 44.7% 44.7% 44.7% Operating Expense Per Unit $ 3,680 $ 3,790 $ 3,904 $ 4,021 $ 4,142
Estimated Stabilized NOI $ 1,206,555 Sales Expense Rate 2.00% Months to Stabilized 24 Discount Rate 12.00% Stabilized Occupancy 90.0% Terminal Cap Rate 9.50%
Gross Residual Sale Price $17,068,515 Deferred Maintenance $ 0 Less: Sales Expense $ 341,370 Add: Excess Land $ 0 ----------- Other Adjustments $ 0 Net Residual Sale Price $16,727,145 ----------- PV of Reversion $ 5,385,693 Value Indicated By "DCF" $12,908,919 Add: NPV of NOI $ 7,523,226 Rounded $12,900,000 ----------- PV Total $12,908,919
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ----------------------------------------------------------------------------------------------------- TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% --------------------------------------------------------------------------------------------------------------------- 9.00% $13,655,218 $13,429,220 $13,208,124 $12,991,806 $12,780,149 TERMINAL 9.25% $13,494,541 $13,272,102 $13,054,478 $12,841,548 $12,633,197 CAP RATE 9.50% $13,342,321 $13,123,253 $12,908,919 $12,699,199 $12,493,979 9.75% $13,197,907 $12,982,038 $12,770,824 $12,564,149 $12,361,900 10.00% $13,060,714 $12,847,883 $12,639,634 $12,435,852 $12,236,426
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 SUN RIVER VILLAGE, TEMPE, AZ INCOME LOSS DURING LEASE-UP The subject is currently 73% occupied, below our stabilized occupancy projection. We have estimated a 24-month lease-up period. An adjustment must be made to bring the subject to a stabilized operating level. To account for this income loss during lease-up, we have compared the current DCF analysis to an "as stabilized" DCF analysis assuming the subject's occupancy were stabilized. The difference in net operating income during the lease-up period is discounted to a present value figure of $371,000 as shown in the following table.
DESCRIPTION YEAR 1 YEAR 2 --------------------------------------------------------------- "As Is" Net Operating Income $ 694,185 $1,128,982 Stabilized Net Operating Income $1,008,560 $1,242,752 ------------------------- Difference $ 314,374 $ 113,769 PV of Income Loss During Lease-Up $ 371,388 ---------- Rounded $ 371,000 ----------
CONCESSIONS Due to softness in the market, concessions have been utilized at the subject property and within the market. Based on our discussions with the subject's property manager and those at competing properties, these concessions are expected to continue in the near term until the market returns to a stabilized level. Concessions have been included as a line item deduction within the discounted cash flow analysis. The present value of these concessions equates to $186,000 (rounded). This amount has been deducted from the Direct Capitalization analysis, as well as the Sales Comparison Approach value. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 SUN RIVER VILLAGE, TEMPE, AZ After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 9.00% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 SUN RIVER VILLAGE, TEMPE, AZ SUN RIVER VILLAGE
TOTAL PER SQ. FT. PER UNIT %OF EGI ---------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 2,490,912 $ 8.70 $ 7,458 Less: Vacancy & Collection Loss 15.00% $ 373,637 $ 1.31 $ 1,119 Plus: Other Income Laundry Income $ 18,370 $ 0.06 $ 55 0.80% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 167,000 $ 0.58 $ 500 7.25% ---------------------------------------------------------------- Subtotal Other Income $ 185,370 $ 0.65 $ 555 8.05% EFFECTIVE GROSS INCOME $ 2,302,645 $ 8.05 $ 6,894 OPERATING EXPENSES: Taxes $ 149,298 $ 0.52 $ 447 6.48% Insurance $ 50,100 $ 0.18 $ 150 2.18% Utilities $ 133,600 $ 0.47 $ 400 5.80% Repair & Maintenance $ 126,920 $ 0.44 $ 380 5.51% Cleaning $ 66,800 $ 0.23 $ 200 2.90% Landscaping $ 50,100 $ 0.18 $ 150 2.18% Security $ 6,680 $ 0.02 $ 20 0.29% Marketing & Leasing $ 46,760 $ 0.16 $ 140 2.03% General Administrative $ 283,900 $ 0.99 $ 850 12.33% Management 5.00% $ 115,132 $ 0.40 $ 345 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,029,290 $ 3.60 $ 3,082 44.70% Reserves $ 66,800 $ 0.23 $ 200 2.90% ---------------------------------------------------------------- NET OPERATING INCOME $ 1,206,555 $ 4.22 $ 3,612 52.40% ---------------------------------------------------------------- "GOING IN" CAPITALIZATION RATE 9.00% VALUE INDICATION $ 13,406,166 $ 46.85 $ 40,138 LESS: LEASE-UP COST ($ 371,000) PV OF CONCESSIONS ($ 186,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 12,849,166 ROUNDED $ 12,800,000 $ 44.73 $ 38,323
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 SUN RIVER VILLAGE, TEMPE, AZ DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF ----------------------------------------------------------------------------- 8.25% $14,067,908 $14,100,000 $42,216 $49.27 8.50% $13,637,764 $13,600,000 $40,719 $47.52 8.75% $13,232,199 $13,200,000 $39,521 $46.12 9.00% $12,849,166 $12,800,000 $38,323 $44.73 9.25% $12,486,837 $12,500,000 $37,425 $43.68 9.50% $12,143,578 $12,100,000 $36,228 $42.28 9.75% $11,817,922 $11,800,000 $35,329 $41.23
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $12,800,000. CORRELATION AND CONCLUSION BY THE INCOME APPROACH The two methods used to estimate the market value of the subject property by the income approach resulted in the following indications of value: Discounted Cash Flow Analysis $12,900,000 Direct Capitalization Method $12,800,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $12,900,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 SUN RIVER VILLAGE, TEMPE, AZ RECONCILIATION AND CONCLUSION This appraisal was made to express an opinion as of the Market Value of the fee simple estate in the property. AS IS MARKET VALUE OF THE FEE SIMPLE ESTATE Cost Approach Not Utilized Sales Comparison Approach $13,500,000 Income Approach $12,900,000 Reconciled Value $13,000,000
The Income Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of May 6, 2003 the market value of the fee simple estate in the property is: $13,000,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA SUN RIVER VILLAGE, TEMPE, AZ ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A SUN RIVER VILLAGE, TEMPE, AZ EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A SUN RIVER VILLAGE, TEMPE, AZ SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - OFFICE EXTERIOR - LANDSCAPE & PARK [PICTURE] [PICTURE] EXTERIOR - POOL INTERIOR - BALCONY [PICTURE] [PICTURE] INTERIOR - KITCHEN EXTERIOR - PARKING LOT AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A SUN RIVER VILLAGE, TEMPE, AZ SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - PARKING LOT INTERIOR - BATHROOM [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING INTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] EXTERIOR - TENNIS COURT EXTERIOR - ENTRANCE GATE AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B SUN RIVER VILLAGE, TEMPE, AZ EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B SUN RIVER VILLAGE, TEMPE, AZ PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 LAKEVIEW AT SUPERSTITION THE RIDGE INDIGO SPRINGS 1849 S. Power Rd. 15202 N. 40th St 1464 S. Stapley Dr Mesa, AZ 85206 Phoenix, AZ 85032 Mesa, AZ 85204 [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 PARADISE FALLS APARTMENTS THE COMMONS AT PAPAGO PARK 15611 N 31st St 1010 N 48th St Phoenix, AZ 85032 Phoenix, AZ [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B SUN RIVER VILLAGE, TEMPE, AZ SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE COMPARABLE DESCRIPTION SUBJECT R - 1 R - 2 ------------------------------------------------------------------------------------------------------------------------------------ Property Name Sun River Village La Contenta Lake Front Management Company LOCATION: Address 605 W. 1133 W. 999 E. Baseline Baseline Road Baseline Rd City, State Tempe, AZ Tempe, AZ Tempe, AZ 85283 85283 County Maricopa Maricopa Maricopa Proximity to Subject 0.5 miles from 0.4 miles from Subject subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 286,180 403,872 204,404 Year Built 1981 1985 1974 Effective Age 13 10 8 Building Structure Brick & wood siding walls; asphalt Brick & wood siding walls; Brick & wood siding walls; Type shingle roof asphalt shingle roof asphalt shingle roof Parking Type (Gr., Garage, Open Covered Open, Open, Cov., etc.) Covered Covered Number of Units 334 472 244 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 720 160 $ 539 1 1BD/1BH 720 201 $ 630 Studio 546 20 $ 535 2 2Br/1Ba 846 56 $ 611 2 2BD/1BH 840 119 $ 675 1 BD/1BA 593 48 $ 575 3 2Br/2Ba 1,006 100 $ 683 3 2BD/2BH 1,006 112 $ 750 1 1BD/1BA 755 12 $ 650 4 3Br/2Ba 1,194 12 $ 869 3 2BD/2BH-Large 1,006 20 $ 775 2 2BD/1BA 855 43 $ 675 5 3Br/2Ba 1,446 6 $1,068 3 3BD/2BH 1,200 12 $ 995 2 BD/2BA 935 85 $ 710 3BD/2BH 1,500 8 $1,015 3 2BD/2BA 990 24 $ 800 5 3BD/2BA 1,330 12 $1,025 Average Unit Size (SF) 857 856 838 Unit Breakdown: Efficiency 0% 2-Bedroom 39% Efficiency 0% 2-Bedroom 53% Efficiency 0% 2-Bedroom 62% 1-Bedroom 61% 3-Bedroom 0% 1-Bedroom 43% 3-Bedroom 4% 1-Bedroom 33% 3-Bedroom 5% CONDITION: Good Good Very Good APPEAL: Average Good Very Good AMENITIES: Unit Amenities Attach. Vaulted X Attach. X Vaulted X Attach. X Vaulted Garage Ceiling Garage Ceiling Garage Ceiling X Balcony X Balcony X X Balcony X Fireplace X Fireplace X Fireplace X Cable TV X Cable TV X Cable TV Ready Ready Ready Project Amenities X Swimming X Swimming X Swimming Pool Pool Pool X Spa/Jacuzzi Car Wash Spa/Jacuzzi X Car Wash Spa/Jacuzzi X Car Wash Basketball X BBQ Equipment X Basketball X BBQ X Basketball X BBQ Court Court Equipment Court Equipment X Volleyball Theater Room Volleyball Theater Volleyball Theater Court Court Room Court Room Sand Volley Meeting Hall X Sand X Meeting X Sand X Meeting Ball Volley Ball Hall Volley Ball Hall X Tennis Court X Secured X Tennis Secured X Tennis Secured Parking Court Parking Court Parking Racquet Ball X Laundry Room Racquet X Laundry Racquet X Laundry Ball Room Ball Room X Jogging Business X Jogging X Business X Jogging X Business Track Office Track Office Track Office X Gym Room X Gym Room X Gym Room OCCUPANCY: 73% 87% 90% LEASING DATA: Available Leasing 6 to 15 7 to 15 6 to 13 Terms Months Months Months Concessions 1 - 1 1/2 Months 1 - 1 1/2 1 - 1 1/2 Free Months Free Months Free Pet Deposit $300 - $500 $300 $300 - $500 Utilities Paid by X Electric X Natural Gas X Electric X Natural Gas X Electric Natural Tenant: Gas X Water Trash X Water Trash X Water Trash Confirmation May 1, 2003; Joseph Beard Property Manager Property Manager (Property Manager) Telephone Number (972)234-1231 480-831-2012 480-838-6111 NOTES: None None COMPARISON TO SUBJECT: Slightly Superior Superior COMPARABLE COMPARABLE COMPARABLE DESCRIPTION R - 3 R - 4 R - 5 ------------------------------------------------------------------------------------------------------------------------------------ Property Name Wilshire Pine El Dorado Somerset Village Management Company LOCATION: Address 208 E. Baseline 1235 W. 5038 South Road Baseline Hardy Drive City, State Tempe, AZ Tempe, AZ Tempe, AZ 85283 85283 85282 County Maricopa Maricopa Maricopa Proximity to Subject 1-mile south of Within 1mile within 1mile of the subject radius subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) Year Built 1975 1983 1982 Effective Age 10 15 10 Building Structure Brick & wood siding walls; Brick & wood siding walls; Brick & wood siding walls; asphalt Type asphalt shingle roof asphalt shingle roof shingle roof Parking Type (Gr., Garage, Open, Open, Cov., etc.) Open, Covered Covered Covered Covered Number of Units 173 N/A 276 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1BD/1BH 1 710 $565 1 1BD/1BH 720 $560 1 1BD/1BH 720 $ 575 1 BD/1BH - Type 2 820 $600 2 2BD/1BH 840 $670 2 2BD/1BH 840 $ 645 2 2BD/1BH 890 $650 3 2BD/2BH 1,006 $680 3 2BD/2BH 1,006 $ 690 4 3BD/2BH 1,200 $865 4 3BD/2BH 1,192 $ 825 5 3BD/2BH 1,500 $955 5 3BD/2BH 1,444 $1,050 Average Unit Size (SF) Unit Breakdown: Efficiency 0% 2-Bedroom 50% Efficiency 0% 2-Bedroom 55% Efficiency 0% 2-Bedroom 41% 1-Bedroom 37% 3-Bedroom 13% 1-Bedroom 29% 3-Bedroom 16% 1-Bedroom 50% 3-Bedroom 8% CONDITION: Fair Good Good APPEAL: Fair Good Good AMENITIES: Unit Amenities X Attach. X Vaulted X Attach. X Vaulted X Attach. X Vaulted Ceiling Garage Ceiling Garage Ceiling Garage X Balcony X X Balcony X X Balcony X X Fireplace X Fireplace X Fireplace X Cable TV X Cable TV X Cable TV Ready Ready Ready Project Amenities X Swimming X Swimming X Swimming Pool Pool Pool Spa/Jacuzzi X Car Wash Spa/Jacuzzi X Car Wash Spa/Jacuzzi X Car Wash X Basketball X BBQ X Basketball X BBQ X Basketball X BBQ Equipment Court Equipment Court Equipment Court Volleyball Theater Volleyball Theater Volleyball Theater Room Court Room Court Room Court X Sand Volley X Meeting X Sand Volley X Meeting X Sand Volley X Meeting Hall Ball Hall Ball Hall Ball X Tennis Court Secured X Tennis Court Secured X Tennis Court Secured Parking Parking Parking Racquet Ball X Laundry Racquet Ball X Laundry Racquet Ball X Laundry Room Room Room X Jogging X Business X Jogging X Business X Jogging X Business Office Track Office Track Office Track X Gym Room X Gym Room X Gym Room OCCUPANCY: 87% 95% 95% LEASING DATA: Available Leasing 6 to 15 6 to 15 6,9,12 Terms Months Months Months Concessions 1 - 1 1/2 1 - 11/2 1 - 1 1/2 Months Free Months Free Months Free Pet Deposit $300 - $500 $300 - $500 $300 - $500 Utilities Paid by X Electric X Natural Gas X Electric X Natural X Electric X Natural Gas Tenant: Gas Water Trash X Water Trash Water Trash Confirmation Property Property Property Manager Manager Manager Telephone Number 480-831-5963 480-820-2724 480-897-0641 NOTES: None None COMPARISON TO SUBJECT: Superior Superior Superior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B SUN RIVER VILLAGE, TEMPE, AZ PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 LA CONTENTA LAKE FRONT WILSHIRE PINE 1133 W. Baseline Road 999 E. Baseline Rd 208 E. Baseline Road Tempe, AZ 85283 Tempe, AZ 85283 Tempe, AZ 85283 N/A [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 EL DORADO SOMERSET VILLAGE 1235 W. Baseline 5038 South Hardy Drive Tempe, AZ 85283 Tempe, AZ 85282 [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C SUN RIVER VILLAGE, TEMPE, AZ EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C SUN RIVER VILLAGE, TEMPE, AZ No responsibility is assumed for matters legal in nature. No investigation has been made of the title to or any liabilities against the property appraised. In this appraisal, it is presumed that, unless otherwise noted, the owner's claim is valid, the property rights are good and marketable, and there are no encumbrances which cannot be cleared through normal processes. To the best of our knowledge, all data set forth in this report are true and accurate. Although gathered from reliable sources, no guarantee is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis. Land areas and descriptions used in this appraisal were obtained from public records and have not been verified by legal counsel or a licensed surveyor. No soil analysis or geological studies were ordered or made in conjunction with this report, nor were any water, oil, gas, or other subsurface mineral and use rights or conditions investigated. Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials could, if present, adversely affect the value of the property. Unless otherwise stated in this report, the existence of hazardous substance, which may or may not be present on or in the property, was not considered by the appraiser in the development of the conclusion of value. The stated value estimate is predicated on the assumption that there is no material on or in the property that would cause such a loss in value. No responsibility is assumed for any such conditions, and the client has been advised that the appraiser is not qualified to detect such substances, quantify the impact on values, or develop the remedial cost. No environmental impact study has been ordered or made. Full compliance with applicable federal, state, and local environmental regulations and laws is assumed unless otherwise stated, defined, and considered in the report. It is also assumed that all required licenses, consents, or other legislative or administrative authority from any local, state, or national government or private entity organization either have been or can be obtained or renewed for any use which the report covers. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C SUN RIVER VILLAGE, TEMPE, AZ It is assumed that all applicable zoning and use regulations and restrictions have been complied with unless a nonconformity has been stated, defined, and considered in the appraisal report. Further, it is assumed that the utilization of the land and improvements is within the boundaries of the property described and that no encroachment or trespass exists unless noted in the report. The Americans with Disabilities Act ("ADA") became effective January 26, 1992. We have not made a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey of the property together with a detailed analysis of the requirements of the ADA could reveal that the property is not in compliance with one or more of the requirements of the act. If so, this fact could have a negative effect on the value of the property. Since we have no direct evidence relating to this issue, we did not consider the possible noncompliance with the requirements of ADA in estimating the value of the property. We have made a physical inspection of the property and noted visible physical defects, if any, in our report. This inspection was made by individuals generally familiar with real estate and building construction. However, these individuals are not architectural or structural engineers who would have detailed knowledge of building design and structural integrity. Accordingly, we do not opine on, nor are we responsible for, the structural integrity of the property including its conformity to specific governmental code requirements, such as fire, building and safety, earthquake, and occupancy, or any physical defects which were not readily apparent to the appraiser during the inspection. The value or values presented in this report are based upon the premises outlined herein and are valid only for the purpose or purposes stated. The date of value to which the conclusions and opinions expressed apply is set forth in this report. The value opinion herein rendered is based on the status of the national business economy and the purchasing power of the U.S. dollar as of that date. Testimony or attendance in court or at any other hearing is not required by reason of this appraisal unless arrangements are previously made within a reasonable time in advance for AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C SUN RIVER VILLAGE, TEMPE, AZ such testimony, and then such testimony shall be at American Appraisal Associates, Inc.'s, prevailing per diem for the individuals involved. Possession of this report or any copy thereof does not carry with it the right of publication. No portion of this report (especially any conclusion to use, the identity of the appraiser or the firm with which the appraiser is connected, or any reference to the Appraisal Institute or the designations awarded by this organization) shall be disseminated to the public through prospectus, advertising, public relations, news, or any other means of communication without the written consent and approval of American Appraisal Associates, Inc. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D SUN RIVER VILLAGE, TEMPE, AZ EXHIBIT D CERTIFICATE OF APPRAISER (1 PAGE) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D CERTIFICATE OF APPRAISER I certify that, to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the unbiased professional analyses, opinions, and conclusions of American Appraisal Associates, Inc. American Appraisal Associates, Inc. and I personally, have no present or prospective interest in the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. Compensation for American Appraisal Associates, Inc. is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I personally did not inspect the subject property. Ryan Tanaka provided significant real property appraisal assistance in the preparation of this report. I am currently in compliance with the Appraisal Institute's continuing education requirements. -s- Douglas Needham -------------------- Doug Needham, MAI Managing Principal, Real Estate Arizona State Certified General Real Estate Appraiser #30943 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E SUN RIVER VILLAGE, TEMPE, AZ EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E SUN RIVER VILLAGE, TEMPE, AZ DOUGLAS A. NEEDHAM, MAI MANAGING PRINCIPAL, REAL ESTATE ADVISORY GROUP POSITION Douglas A. Needham is a Managing Principal for the Irvine Real Estate Advisory Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Needham has appraised all types of major commercial real estate including apartments, hotels/motels, light and heavy industrial facilities, self-storage facilities, mobile home parks, offices, retail shopping centers, service stations, special-use properties, and vacant land. Business Mr. Needham joined AAA in 1998. Prior to joining AAA, he was a senior associate at Koeppel Tener, a senior analyst at Great Western Appraisal Group, and an associate appraiser at R. L. McLaughlin & Associates. EDUCATION Texas A&M University Bachelor of Business Administration - Finance STATE CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #30943 State of California, Certified General Real Estate Appraiser, #AG025443 State of Colorado, Certified General Appraiser, #CG40017035 State of Oregon, Certified General Appraiser, #C000686 State of Washington, Certified General Real Estate Appraiser, #1101111 PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E SUN RIVER VILLAGE, TEMPE, AZ VALUATION AND Appraisal Institute SPECIAL COURSES Advanced Income Capitalization Appraisal Principles Appraisal Procedures Basic Income Capitalization Standards of Professional Practice AMERICAN APPRAISAL ASSOCIATES, INC. SUN RIVER VILLAGE, TEMPE, AZ GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. SUN RIVER VILLAGE, TEMPE, AZ GENERAL SERVICE CONDITIONS The services(s) provided by AAA will be performed in accordance with professional appraisal standards. Our compensation is not contingent in any way upon our conclusions of value. We assume, without independent verification, the accuracy of all data provided to us. We will act as an independent contractor and reserve the right to use subcontractors. All files, workpapers or documents developed by us during the course of the engagement will be our property. We will retain this data for at least five years. Our report is to be used only for the specific purpose stated herein; and any other use is invalid. No reliance may be made by any third party without our prior written consent. You may show our report in its entirety to those third parties who need to review the information contained herein. No one should rely on our report as a substitute for their own due diligence. We understand that our reports will be described in public tender offer documents distributed to limited partners. We reserve the right to review the public tender offer documents prior to their issuance to confirm that disclosures of facts from the current appraisals are accurate. No reference to our name or our report, in whole or in part, in any other SEC filing or private placement memorandum you prepare and/or distribute to third parties may be made without our prior written consent. The Tender Offer Partnerships, as that term is defined in the Settlement Agreement, agree to indemnify and hold us harmless against and from any and all losses, claims, actions, damages, expenses or liabilities, including reasonable attorneys' fees, to which we may become subject in connection with this engagement except where such losses, claims, actions, damages, expenses or liabilities, including reasonable attorney's fees, arise or result from AAA's misconduct, bad faith or negligence. Co-Clients will not be liable for any of our acts or omissions. AAA is an equal opportunity employer.